Spread betting firm fined £35,000

CITY Index, one of the country's largest spread betting firms, has been fined £35,000 for producing 'misleading' adverts. The Financial Services Authority criticised the company for a promotional campaign for spread betting and contracts for differences (CFDs) between September and November 2003.

The City watchdog said the strategy had the potential to attract customers to high-risk investments without adequately describing the risks.

The campaign appeared in national daily newspapers, magazines and on sandwich shops' bags. The firm was also fined for failures in its internal controls that allowed the promotions to go ahead.

Spread betting and CFDs are considered high risk because they can incur losses well in excess of the initial stake. The FSA said City Index failed to warn investors about this on every advert and where they did, it was not always in a 'simple and prominent manner'.

The FSA also said a promotion referred to a 'free £25 bet'. It said the bet was not free because customers had to place an initial spread bet through City Index. 'The customer could lose all, and potentially much more, of the customer's initial spread bet before becoming entitled to the 'free' bet,' it said.

'Providing clear, fair and not misleading financial promotions is a key priority for the FSA because of the potential impact that misleading promotions can have on consumers,' said Anna Bradley, director of the FSA's retail themes division.

'We fully accept the FSA's comments,' said Clive Cooke, City Index chief executive. 'We have already taken steps to ensure that financial promotions contain an adequate description of the risks involved with spread betting and contracts for differences. In addition, we have strengthened our controls and procedures for the communication of financial promotions.'

He added that City's adverts at the time were in line with the rest of the industry and that the company had received no complaints from customers about the campaign.

Spread betting has seen phenomenal growth in recent years, with investors drawn to make money even when markets fell. However, the companies have attracted the attention of the City regulator.

In December, Cantor Index was hit with a £70,000 fine for a misleading advertising campaign. The promotion offered consumers a free 'Xda' – a combined handheld computer and mobile phone – in exchange for signing up to its telephone spread betting service. The FSA said the company failed to adequately highlight the dangers of the investment and targeted consumers who had little experience of spread betting.

The watchdog last year established a Financial Promotions Department. Apart from Cantor and City, it has also taken action against insurer AXA Sun-Life, share-tipping company Hemscott Investment Analysis and Highbury Financial Services for a stock tips magazine called Focus.